Notes on Biodiversity Conservation, The Rate of Interest and Discounting

This article shows that there is no regular relationship between the level of the rate of interest and the extent to which the conservation of biodiversity is favoured. Microeconomic examples are given in which a rise in the rate of interest adversely affects biodiversity conservation as well as other cases in which the opposite is the case. When these alternative possibilities are taken into account, they suggest that rises in the rate of interest (other things held constant) are more likely than not to aid biodiversity conservation. This is expected to be so when there considerable upfront costs are involved in economic strategies that bring about environmental changes so that in the initial periods the private net benefits from these changes are negative although subsequently they can become significantly positive. Consideration of macroeconomic models reinforces the view that there is no definite association between changes in biodiversity conservation and the rate of interest. This is so assuming that there is a positive association on the whole, between the rate of (man-made) capital accumulation (the investment level) and biodiversity loss. From macroeconomic models, it is clear an increase in the level of aggregate investment can be associated with a rise or fall in the rate of interest (and vice versa) depending on the circumstances. This is illustrated by using a simplified form of the loanable funds theory originally developed by Wicksell but is also consistent with other general theories of the rate of interest. In conclusion, doubts are raised about our ability to enforce a zero (or very low) social rate of discount in market or mixed economy. It is, however, suggested that if a low ceiling is put on the rate of interest, this will reduce savings and consequently, investment and would be favourable to biodiversity conservation given that an increase in the rate of (man-made) capital accumulation is the main contributor to biodiversity loss. Finally, it is noted that mainstream economic models measuring possible welfare streams give no weight to the conservation of biodiversity per se. Therefore, policies designed to achieve the sustainability objectives specified by these models can continue to favour biodiversity loss on economic grounds.